Download Economic Systems - Net Start Class

Economic Systems
WHAT IS ECONOMICS?


Economics - the study of how
people meet their basic needs
Economists - People who study
economics.
THE PROBLEM OF SCARCITY



2 basic ideas of Scarcity:
People usually have unlimited
wants.
A society can produce only a limited
number of things at any one time
WHAT ARE GOODS AND SERVICES?


Goods - things that people make;
for example: foods, toys, clothes,
cars & houses.
Services - things that people do for
others, examples: electricians,
teachers, plumbers, doctors &
mechanics
APPLYING WHAT YOU HAVE LEARNED

Suppose that everyone in the world
were given 10 million dollars. Do
you think that would end the
problem of scarcity? Explain your
answer.
THE FUNDAMENTAL ECONOMIC
QUESTIONS



WHAT SHOULD BE PRODUCED?
HOW SHOULD IT BE PRODUCED?
WHO SHOULD GET IT?
TYPES OF
ECONOMIC SYSTEMS


Economic system - The way in
which a society answers these 3
economic questions
5 economic systems:
• Traditional
• Free Enterprise
• Communist
• Socialist
• Mixed
TRADITIONAL ECONOMY

Economic Decisions: Custom and
tradition determine what should be
produced, how it should be
produced, and for whom
TRADITIONAL ECONOMY

Production: based on
custom and timehonored methods.
• New ideas are
discouraged
• Change and growth
proceed very slowly
TRADITIONAL ECONOMY

Private Property: is no private
property: owned by the family or
village in common
TRADITIONAL ECONOMY


Trade: very little
trade with outsiders,
good produce &
consumer locally
Barter system (trade
things for things
PRODUCTION METHODS

Traditional economies are generally
marked by subsistence agriculture
and cottage industries
PRODUCTION METHODS

Subsistence
Agriculture: primarily
involved with feeding
themselves from their own
land and livestock, there
is no surplus, so very little
is sold or traded.
• In most of Africa, Asia, and
many parts of Latin America,
people are subsistence
farmers.
PRODUCTION METHODS

Cottage Industries: people use
their spare time in their home to
produce goods by hand, examples:
weave cloth, make furniture and
clothes, and
• Help farm families meet their needs
(extra income during winter months)
PRODUCTION METHODS


Today, traditional economies are still
found in many rural, non-industrial
areas.
Examples: Bedouins of Saudi Arabia,
Aboriginal people of Australia,
Bushmen of the Kalahari, Berbers of
Algeria
FREE ENTERPRISE SYSTEM


Also known as capitalism or the
free market system
3 fundamental questions are
answered by:
• Interplay between consumers (buyers)
and producers (sellers)
FREE ENTERPRISE SYSTEM

Private Property:
People have a right to
own private property
and to use it as they
see fit with limited
governmental
interference
• Examples: personal
possessions, factories,
farms, businesses
FREE ENTERPRISE
SYSTEM

Free Enterprise: People are free to
take part in any business, buy any
product, or sell any legal product.
• Businesses are also free to do anything
they wish in order to attract customers
– such as lower prices, provide better
quality goods, advertise, etc.
FREE ENTERPRISE SYSTEM


Profit – what remains after the cost
of running the business are paid
Profit Motive: The ability to make
profits is what drives people to risk
their money in starting a new
business
FREE ENTERPRISE SYSTEM


HOW PRICES ARE DETERMINED
Supply and Demand: The
interaction of supply and demand
determine prices in a free market
economy.
• When demand is high, the price goes up
• If the supply is high but demand is low,
the price goes down
INTERACTION OF SUPPLY &
DEMAND
P
R
I
C
E
LOW DEMAND/
LARGE SUPPLY
P
R
I
C
E
HIGH DEMAND/
SHORT SUPPLY
FREE ENTERPRISE SYSTEM MAIN
FEATURES


Supply and demand
is the force behind
how resources are
allocated/assigned.
Supply and demand
lead to the
distribution of
resources in the
most efficient way
possible.
FREE ENTERPRISE SYSTEM MAIN
FEATURES

Free enterprise economies will
eliminate inefficient producers and
limit the production of unwanted
goods
FREE ENTERPRISE SYSTEM
THE ROLE OF
GOVERNMENT:
 Limited government
interference
 BUT, GOVERNMENT:
• Provides and enforces
common rules
• Maintains a monetary
system
• Provides for the nation’s
defense (protection)
FREE ENTERPRISE SYSTEM
THE ROLE OF
GOVERNMENT:
• Protects people’s rights
to own property
• Break up or regulate
companies that have
obtained so much power
that they could defy
market forces
(Monopolies)
FREE ENTERPRISE SYSTEM
PRODUCTION METHODS:
 Commercial agriculture, crop
production for distribution to
wholesalers and retailers
• Supermarkets & grocery stores
• Large-scale commercial agriculture
makes production cheaper
FREE ENTERPRISE SYSTEM
PRODUCTION METHODS:

Commercial industries, goods
manufactured in factories for sale
throughout the country or overseas
FREE ENTERPRISE SYSTEM
EXAMPLES:

The free enterprise system exists in
such nations as the United States,
Great Britain, France, Chile,
Japan, Canada, Germany, and
Singapore
FREE ENTERPRISE SYSTEM
APPLYING WHAT YOU HAVE LEARNED:
 Think of a good or service you
bought recently.
 Explain how the interaction of supply
and demand most likely determined
how much you paid for the product.
COMMUNISM


Developed in the 1800s by Karl Marx
Marx believed that business owners
(capitalist) use their wealth to take
advantage of workers by taking away
most of the value of what they produced
COMMUNISM


Workers would eventually rise up and
overthrow their capitalist rulers in a
violent revolution
Communism would be the result
COMMUNISM

Role of Government: All major
decisions on production, distribution
and the use of resources are made by
government planners
COMMUNISM

Private Property: None, ownership
abolished & national ownership of all
land, factories, farms, and major
resources.
COMMUNISM

Cooperation: Communism based on
cooperation, all workers should labor
together & share equally.
• The economy is supposed to be run for
the benefit of all members
• In practice, government leaders run
things to prepare for true communism
COMMUNISM

Major Goal: The
goal is to achieve
a classless society
• Equality among all
workers
DOWNFALL OF COMMUNISM

There once were many Communist
states
•
•
•
•
•
•

Soviet Union
Countries of Eastern Europe
China
North Korea
Vietnam
Cuba
The Soviet Union and Eastern
Europe abandoned Communism in
the late 1980’s & 90
DOWNFALL OF COMMUNISM
1.
Economies could not keep up with
the goods produced by free
enterprise systems
2. Without incentives most workers
failed to work hard or to do their
best
3. Corruption became widespread
• Bribing government officials for
better/more stuff
COMMUNISM TODAY

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China, North Korea, Vietnam, and
Cuba are still Communist countries
China, however, has kept it
communist political system but has
taken steps towards creating a free
enterprise economy
SOCIALISM


Began in the 1800s as a
political movement in
response to exploitation of
workers in Europe
(industrialization)
Government owns major
industries but allows other
industries to function as a
free enterprise economy
also called “free market
socialism” because state not
involve planning.
SOCIALISM

View the
government as
the best protector
of workers
SOCIALISM

Role of Government: brings end to
poverty by controlling of major
resources of the nation (railroads,
airlines, radio stations, banks,
utility companies) and by providing
public services (health care,
education, food stamps, housing,
etc)
SOCIALISM

Economic Decisions: productions,
distribution and the use of resources
are made by the government.
SOCIALISM

Private Property: Major industries
are owned by the government
• Other property is held privately
• Small businesses and manufacturers
SOCIALISM

Major Goal: a fairer
distribution of
income among all
members of society.
• People’s basic needs
(health care,
transportation,
education, housing)
are met for free or at
very low cost, but
high taxes
EXAMPLES OF SOCIALIST
COUNTRIES


Sweden and Israel
After WWII, most countries in
Western Europe
• However, sold off their public
ownership of major industries in the
1980’s and 1990’s in a wave of
“privatization”
MIXED ECONOMY


In the real world,
no economy
follows any one
economic system.
Most countries
have economies
that blend features
of each.
APPLYING WHAT YOU HAVE
LEARNED
Economic
Systems
What to
Produce?
How is it
Who Gets
Produced? it?
Traditional
Set by
tradition &
custom
Set by
tradition &
custom
Free
Enterprise
Interaction
of
producer/
consumers
Producers
Consumers
decide how decide who
to produce get
products
Set by
tradition &
custom
APPLYING WHAT YOU HAVE
LEARNED
Economic
Systems
What to
Produce?
How is it
Who Gets
Produced? it?
Communism Determined
by
government
planners
Determined
by
government
planners
Determined
by
government
planners
Socialism
Determined
by
government
planners
Consumers
determine
who get
products
Determined
by
government
planners